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Restructuring
CalPERS and CalSTRS |
An initiative sponsored by the Governor has been filed by Jon Coupal, president of the Howard Jarvis Taxpayers Association, titled The Fair and Fiscally Responsible Public Employee Retirement Act. Make no mistake about it. There is nothing "Fair" or "Fiscally Responsible" about this proposed act. This initiative would establish the California Public Employee Defined Contribution Plan, which would require all public employees, including educational workers, hired on or after July 1, 2007, to enroll in a defined contribution plan for their retirement, rather than the defined benefit plans that are the current pension plans for these employees. Under the guise of controlling pension costs to the state, the Governor has proposed privatizing the state pension plans. In reality, this restructuring would cost California $5.9 billion during the first 10 years for CalSTRS alone. That is because Schwarzenegger’s proposal calls for running dual pension systems--one for currently employed workers, and one for workers hired on or after July 1, 2007.
Many believe that this "restructuring" is motivated by corporate and Wall Street interests that want to rid these pension funds of their enormous clout. CalSTRS and CalPERS are two of the biggest pension funds in the country and have long been proponents of protecting the market from abuses such as those that occurred in the World-Com and Enron frauds, where these pension plans lost more than $1 billion.
"In pursuing corporate reform," stated Phil Angelides recently in the L. A. Times, "the pension funds are operating not just in their own self-defense. They are also a powerful voice in the boardroom protecting the interests of millions of families that have invested their savings in the markets." Thus, big business wants these pension funds desolved and stripped of their clout. Moving from a defined benefit to a defined contribution plan would do just that!
What is a Defined Benefit Plan?
A defined benefit (DB) plan is the current pension plan enjoyed by California teachers. CalSTRS provides one of the richest and healthiest DB plans for educators in the nation. A DB plan provides benefits that are "defined", determined by a formula based on the age, years of service and final compensation of the member at retirement. In the CalSTRS current plan, enhancements are provided in the form of an increase in the age factor and a dollar increase in the monthly benefit, for members who retire with 30 or more years of service. Monthly benefits are increased by 2 percent of the original benefit each year, and an additional benefit is paid quarterly if the purchasing power of the current benefit is less than 80 percent of the value of the original benefit. Disability and survivor benefits are provided in a DB plan, but not in a defined contribution plan. The funds in a DB plan are invested by professional money managers, who have the advantage of working with a huge pool of money.
What is a Defined Contribution Plan?
A defined contribution (DC) plan is a plan funded by the employee and generally the employer who make "defined" contributions to the employee’s retirement account. Employees must do their own investing with the funds in this account, or hire a financial planner to do so. Any benefit available from this account at the employee’s date of retirement would depend on the person’s ability to manage the account and the status of the investment market when he or she retires. The employee assumes the entire risk, whereas in a DB plan the risk is pooled across the entire plan. At retirement the employee must either roll over the investments in the account to an annuity that would pay a monthly income for life or draw down the assets from the account each month. Because most teachers do not have the advantage of a Social Security pension, there would be no "defined" benefit on which one could depend.